Small manufacturers are planning to hire more staff and spend £20.2bn to
replace outdated machinery over the coming year – but often simply to cope
with the “unrealistic” demands of customers.

Research by the Government’s Manufacturing Advisory Service (MAS) found that widespread optimism over increased sales was being tempered by a squeeze on margins and an inability to meet lead times requested by clients.

Almost half (48pc) of the 700 companies surveyed by MAS said they were planning to invest in new machinery and premises, while more than a third (39pc) intended to buy or develop new technologies.

Both figures represent a small improvement on the same period last year, with more small manufacturers also anticipating hiring staff and seeing a rise in sales.

However, more than half of companies (52pc) said the poor profit margins they were being quoted by potential clients were causing them to turn away work.

Lorraine Holmes, area director for MAS in the North and West, said: “There appeared to be a greater appetite from SMEs for investment in order to remain competitive, and I think we are also seeing a desire to create jobs to meet expected demand.”

However, she added: “Poor profit margins and lead times both paint a potential picture of unrealistic customer expectations and it appears that manufacturers are favouring a more pragmatic approach to taking work on.

“An inability to meet design specification and issues with equipment capability were also quoted as possible barriers and this could underline the renewed desire for investment in new machinery and technology.”

MAS provides advice to small manufacturers on how they can improve their efficiency and identify new commercial opportunities. It has helped more than 9,000 small firms since January last year.

Separate research found that many small businesses were delaying investment until the last moment, with the need to update machinery often driven by deteriorating equipment rather than a desire to boost productivity.

GE Capital, the finance arm of General Electric, said small and medium-sized manufacturers intended to spend £20.2bn in the coming year, up 38pc compared with the third quarter of 2012.

Ilaria del Beato, chief executive of GE Capital UK, said there was a “degree of positivity” among companies, but said it was “telling that replacement rather than growth is the key driver”.

GE also warned that investment intentions among small businesses in the UK were also growing at a slower pace than among their counterparts in Germany and Italy. Small and medium-sized companies across all sectors planned to spend a combined £51.5bn and create more than half a million jobs over the coming year, GE Capital said.